Over the past couple of days, we'​ve quoted from some of the Financial Stability Board'​s "​Public responses to consultation on policy proposals to enhance money market fund resilience". The comments page says, "​On 30 June 2021, the FSB published Policy proposals to enhance money market fund resilience: Consultation Report. Interested parties were invited to provide written comments by 16 August 2021. The public comments received are available below. The FSB thanks those who took the time and effort to express their views. The FSB expects to publish the final policy proposals in October 2021." Today, we quote from a comment from Patomak Global Partners, a consulting firm which includes former SEC Commissioner Paul Atkins and former SEC Director Craig Lewis. They write, "In this letter, we highlight some general observations regarding MMFs and discuss the way these funds and their underlying investments performed during the market events of March 2020. We also examine the potential financial market risks of MMFs -- including systemic risk -- and address some of the specific policy proposals in the Consultation Report. Our letter seeks to emphasize the following points: 1) MMFs provide unique benefits as a cash management tool and are uniquely important to commercial paper markets. MMFs play a positive and important role in the global financial system. Banking regulations have resulted in banks turning away deposits, thus increasing the important role that MMFs play for investors. MMFs account for a large share of the buy-​side market for CP, particularly for banks reliant on U.​S. Dollar ('​USD') wholesale funding. 2) Contrary to conventional thinking, the data shows that MMFs were quite resilient during March 2020, and the discussions of MMF vulnerabilities should focus on the stress-​amplifying effects of the unintended consequences of current regulations. Retail MMFs and government MMFs did not exhibit any significant vulnerabilities during the market events of March 2020, and survey data shows that many institutional prime MMF investors actually increased their prime MMF holdings during this time as well. Redemptions by institutional investors from prime MMFs were largely driven due to the '​cliff effect' associated with liquidity thresholds that would trigger requirements for fund boards to consider imposing redemption gates." The letter says in its third point, "Market events of March 2020 underscore the need for a holistic look at risks associated with private short-​term funding markets. Regulatory reform should be focused on the source of systemic risk -- the banking sector -- not MMFs. Redemptions from institutional MMFs did not trigger the March 2020 stress experienced in short-​term lending markets. While improvements to MMF liquidity regulation can mitigate the modest amplifying effects that prime MMF redemptions can have on market stress, the primary focus of regulators should be the fragile funding sources of banks, particularly non-​U.​S. '​universal' banks." Finally, it adds, "As regulators contemplate future reforms, simple actions that address the root causes of 2020 market issues are preferable. Removing the SEC regulatory threshold that led to accelerated institutional prime MMF redemptions in favor of discretionary gating would go a long way towards addressing valid concerns about the stress-​amplifying role that some MMFs can play. To directly address concerns about systemic risks related to short-​term lending market risks, however, regulators should focus on improving banking sector regulations -- not the sideshow of MMFs."

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